The first shakeup to the Dow Jones Industrial Average in nearly six years will happen on Monday. That’s when Amazon will join the Dow and Walgreens will be removed from the index. Here’s what you need to know:
What is the Dow?
The Dow (DJIA) is a stock market index that contains 30 of the most prominent companies in the United States. Each company included in the Dow is weighted by its stock price, not its market cap. Following the index can help give retail investors insight into how the overall stock market is performing and, to a lesser degree, how the U.S. economy is performing.
How are companies chosen for the Dow?
Though changes to the Dow lineup are rare, they do occasionally happen. Changes are made so that the companies in the Dow more accurately reflect their industry’s impact on the U.S. economy. Amazon’s ascension to the Dow on February 26 will see the index gain its third tech giant. Microsoft and Apple are already on the Dow. With Amazon’s ascension, the Dow will more accurately reflect the importance of the tech industry on the U.S. economy.
But because the Dow contains just 30 companies, when a new company joins, another company needs to get removed. This time that company is Walgreens Boots Alliance, Inc. Walgreens was only added to the Dow in June 2018, replacing General Electric, the only original company that was on the Dow when the index came into being in 1896.
Why is this happening now?
Amazon ascending to the Dow and Walgreens leaving it has less to do with anything that either of those companies have done. Rather, it has more to do with what Walmart—which competes with both companies—is about to do.
Last month, Walmart, a Dow-listed company, announced it will split its shares 3-to-1 this Friday. Because Walmart’s share price will thus be three times lower and Dow companies are weighted by share price and not market cap (which won’t change with the share split), the Dow needs to be reconfigured. Thus, the Dow is bringing in Amazon, and dropping Walgreens Boots Alliance, which currently has the lowest weighting of all 30 companies on the Dow.
As Dow owner S&P Global explained in a release announcing the change, “Reflecting the evolving nature of the American economy, this change will increase consumer retail exposure as well as other business areas in the DJIA. The index change was prompted by DJIA constituent Walmart Inc.’s (NYSE:WMT) decision to split its stock 3:1, which will reduce Walmart’s index weight due to the price weighted construction of the index.”
How has the news impacted the companies’ stock?
Amazon shares (ticker: AMZN) are little changed by the Dow news. The stock is trading about 1% higher in premarket as of the time of this writing. Walgreens Boots Alliance shares (WBA) are trading down about 2.5% in premarket as of the time of this writing.
